FFIEC suggests checks on firms' appraisal bias controls

Financial services stakeholders are issuing more guidelines around appraisal bias, describing how examiners should ensure firms mitigate risks. 

The Federal Financial Institutions Examination Council on Monday laid out principles to ensure fair real estate valuations at a time when discrimination in the field is under scrutiny. The directives outline how reviewers should check a firm's financial risks and ensure they're following consumer protection laws. 

"The failure of internal controls to identify, monitor, and control valuation discrimination or bias could negatively affect credit decisions, potentially exposing an institution to legal and compliance risks or affecting an institution's financial condition," the FFIEC's six-page statement read. 

The release comes almost a year after some of the same agencies that are part of the FFIEC issued proposed rules around computer-generated appraisals. Consumers in recent years have filed lawsuits against bank and non-bank lenders over alleged instances of appraisal bias, while regulators have taken numerous steps to combat such discrimination.

The FFIEC includes Consumer Financial Protection Bureau and the National Credit Union Administration, among other banking regulators. Monday's statement didn't specifically mention mortgages or independent mortgage banks, but cited the Truth in Lending Act and other home finance-related regulations as relevant statutes. 

Examiners should review how a company's board and senior management ensure their operations entail risk-free appraisals, the FFIEC said.

That guidance, described as consumer compliance principles, suggests reviewers check a wide range of a companies' policies, procedures, training, auditing and third-party risk management regarding valuation bias. 

Also included are principles to check a financial institution's risk profile arising from potential bias, which FFIEC describes as "safety and soundness." That lengthy oversight includes aspects covered in the above principles, along with further risk assessments of a firm's financial profile.

Poor findings in examinations should reflect in a firm's Uniform Interagency Consumer Compliance Rating System, or UFIRS, the statement said. The Federal Deposit Insurance Corp.'s most recent annual report in 2022 said 42 insured institutions with total assets of $163.8 billion were designated as "problem institutions" based on their UFIRS rating.

Housing stakeholders, including the White House, have made attempts in recent years to combat such discrimination and address smaller changes unfairly influencing valuations. Fannie Mae last week said it won't tolerate appraisals that reference crime, a move following an update to the Uniform Standards of Professional Appraisal Practices in January.